Between about December 2007 and June 2009, the United States was considered to b
ID: 2786340 • Letter: B
Question
Between about December 2007 and June 2009, the United States was considered to be in a recession. The U.S. Gross Domestic Product fell approximately 3% from the third quarter of 2008 to the third quarter of 2009. Also, during December 2007 and June 2009, the Standard and Poor’s 500 index dropped by 38% and the unemployment rate climbed from 5% to 9.5%.
The macroeconomic situation affected almost all companies since higher unemployment affected personal consumption, which dropped from 10,140.3 Billion Dollars in Aug 2008 to 9,807 Billion Dollars in June 2009, a drop of 3.8 percent.
Starbucks is one of the companies affected by the December 2007 recession. The following table shows several ratios for Starbucks corresponding to the years 2006, 2007, and 2008. Use a stock price of 10.9 dollars per share for the year 2009.
Year
2006
2007
2008
2009
ROE
0.253
0.294
0.127
ROA
0.106
0.126
0.056
ROIC
0.207
0.250
0.121
Asset Turnover
1.758
1.761
1.830
Op. Profit Margin
0.115
0.746
0.048
Long Term Debt Ratio
0.0009
0.241
0.221
D/E Ratio
0.987
1.340
1.277
Current Ratio
0.970
0.787
0.798
Quick Ratio
0.462
0.466
0.482
Payout Ratio
0.000
0.000
0.000
Plowback Ratio
1.000
1.000
1.000
Market to Book Ratio
6.088
3.099
1.374
Stock Price Used for Mark/Book
17.71
9.450
4.68
h- Explain why you expect the quick ratio to increase or decrease during a recession?
Year
2006
2007
2008
2009
ROE
0.253
0.294
0.127
ROA
0.106
0.126
0.056
ROIC
0.207
0.250
0.121
Asset Turnover
1.758
1.761
1.830
Op. Profit Margin
0.115
0.746
0.048
Long Term Debt Ratio
0.0009
0.241
0.221
D/E Ratio
0.987
1.340
1.277
Current Ratio
0.970
0.787
0.798
Quick Ratio
0.462
0.466
0.482
Payout Ratio
0.000
0.000
0.000
Plowback Ratio
1.000
1.000
1.000
Market to Book Ratio
6.088
3.099
1.374
Stock Price Used for Mark/Book
17.71
9.450
4.68
Explanation / Answer
Quick ratio = (current assets – inventories)/current liabilities. During recession the accounts receivables tend to rise as customers are unable to clear their dues on time and thus the quick ratio increases or decreases during the recession.
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